One of These Telecoms Will Lose Big

Like the proverbial butterfly wing flap that becomes a hurricane, a seemingly insignificant telecom merger has engulfed some of the largest telecom companies on the planet.

The merger was announced on July 23. Spanish company Telefonica (NYSE: TEF) proposed combining its German "O2" unit with the German "E-Plus" unit of Dutch provider KPN (NASDAQOTH: KKPNY) . This would take the current No. 3 (E-Plus) and No. 4 (O2) mobile providers in Germany and combine them into the country's largest, with 38% of market share.

This seemed like it might be a blow to the top two German mobile providers, Vodafone and Deutsche Telekom, but the market yawned, because the proposed merger would take a year or more to make it past EU regulators.

Things get tense But on July 29, the Financial Times reported that two KPN board members voted against the merger. This was significant, because they were appointed to the board by America Movil (NYSE: AMX) the giant Mexican telecom, which controlled nearly 30% of KPN. People assumed that America Movil's owner, Mexican billionaire Carlos Slim, didn't want his chief Latin American telecom rival, Telefonica, to benefit in Germany. However, the merger looked as though it would go forward over Slim's presumed objections.

Then, on August 8, America Movil made a public offer to buy the remaining 70% share of KPN it didn't already own, provided it would control more than 50% of the company's voting rights. In the text of its offer, America Movil expressly stated it was "carefully evaluating the merits of the proposed [sale of E-Plus] and will make a final determination in relation to the exercise of its voting rights at the upcoming Extraordinary General Meeting of KPN."

Analysts believed that Slim's primary motivation for making the offer was to keep E-Plus; owning it and KPN would allow America Movil to easily enter the German mobile market, which would be extraordinarily difficult otherwise. Of the four German mobile providers--Vodafone, Deutsche Telekom, Telefonica, and KPN--only KPN is small enough to be a likely takeover target, the four companies control virtually all of Germany's wireless infrastructure and customer base, leaving little opportunity for a newcomer.

Instead of backing down, Telefonica sweetened the pot on August 24 by adding another 450 billion euros to its offer for E-Plus. America Movil surprised everyone by agreeing. However, Slim didn't withdraw his offer to buy KPN outright.

Things get ugly At this point, I have to mention that KPN is overseen by a foundation with the extraordinarily long name of "Stichting Preferenteaandelen B KPN," or literally, "The KPN Preferred Shares Foundation." One of the foundation's mandates is to prevent hostile takeovers of the company. And it has some extraordinary tools in its arsenal to do just that.

On August 29, it used one of those tools, issuing itself 4.3 billion special shares of stock in KPN, which not only gave it control of more than 50% of the company--and the company's voting rights--but also effectively halved America Movil's own stake to a mere 14%. Slim announced he was considering dropping his takeover offer as a result of the Foundation's actions.

But he didn't, and talks between Slim, KPN, and the Foundation began. Then, in a bizarre twist, KPN's CFO, Eric Hageman, quit unexpectedly on September 9, citing unexplained "personal circumstances" unrelated to the current situation. Analysts agreed that the timing was bad for KPN, since it left them without a key finance executive at a time they certainly needed one.

On September 11, KPN shares spiked on speculation that Slim was about to increase his takeover offer, but aside from a September 12 statement from Slim that he is "still in talks" with KPN, there has been radio silence.

What's the takeaway? It seems as though no matter what happens, Telefonica is a winner here. Slim has consented to the E-Plus sale, and the foundation was never opposed to it, so no matter which of them ends up in charge of KPN, the deal is as good as done. However, even when the sale is approved, there'll still be a yearlong regulatory process before it can be implemented, so don't expect positive stock moves anytime soon.

Vodafone and Deutsche Telekom will probably also emerge unscathed, since the turmoil among their rivals leaves them in a comparatively strong position.

If Slim can't win the foundation over, things look bad for KPN. Its shares spiked on speculation of a takeover and payout, and would almost certainly retreat again without one. America Movil's stock would also likely drop, as a battered Slim finds himself shut out of both his Dutch and German aspirations.

If America Movil manages to prevail, however, and is able to purchase KPN, shareholders of both companies stand to benefit. But with so much up in the air, I plan to stay on the sidelines for now.

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